Hard times are inevitable in life. Unfortunately, when those hard times involve financial strain it can become extremely difficult to determine how to proceed forward. In circumstances where financial strain causes you to acquire a large amount of debt, filing for bankruptcy is often your best option.

However, while filing for bankruptcy can ultimately end up resolving your issue with debt, it comes with its own set of challenges. None more notable than the loss of credit score.

Credit score is important because it is what lenders look to when determining if they will extend a loan or a line of credit to you. Therefore, when bankruptcy wreaks havoc on your credit score it is imperative to lay out a plan in order to fix the problem.

There are a number of strategies in order to do just that. If you are interested in learning more, keep reading to acquire knowledge on:

  • Bankruptcy
  • When to file for bankruptcy
  • Types of bankruptcy
  • How to build credit after bankruptcy

What Is Bankruptcy?

Two people sitting side-by-side reviewing bankruptcy paperwork.
There are many factors to consider when deciding whether or not to file for bankruptcy, Image courtesy of Legal Zoom.

Bankruptcy is useful for the individual who owes an outstanding amount of money, most often in the form of debt. If the individual is unable to repay the debt they own, they can then decide to file for bankruptcy.

The process of bankruptcy works to relieve the individual who is filing of their debt as well as providing some form of compensation to those they are indebted to. In order to do so, when someone files for bankruptcy certain amounts of their assets are liquidated. This liquidated amount is then paid to the loaners to whom the money is owed.

This allows the individual filing for bankruptcy to achieve a clean slate in terms of debt repayment. Therefore, as long as a bankruptcy is successfully processed, then the individual filing no longer has any debts they cannot repay.

Like everything, the bankruptcy process possesses both pros and cons. The pros, as we’ve stated, is a clean slate in terms of debt. The main con of bankruptcy is the negative impact to one’s credit score. That’s why we will be talking about the ways in which you can rebuild your credit score after filing for bankruptcy.

Types of Bankruptcy

There are three main types of bankruptcy proceedings that we will be discussing. Those are:

  • Chapter Seven Bankruptcy
  • Chapter Eleven Bankruptcy
  • Chapter Thirteen Bankruptcy

Chapter Seven Bankruptcy

Chapter seven bankruptcy is most useful for those unable to fully pay their credit card or medical debt. Therefore, they can use chapter seven bankruptcy in order to liquidate their nonexempt assets. However, those who only have exempt property rather than nonexempt assets will not have to liquidate these items.

Chapter Eleven Bankruptcy

Chapter eleven bankruptcy is most likely to be filed by businesses rather than individuals. Essentially, this form of bankruptcy revolves around the idea of keeping a business alive by lowering costs and raising money earned. Because of this, the business can stay up and running while paying their outstanding debt.

Chapter Thirteen Bankruptcy

Chapter thirteen bankruptcy differs from the other two types as it is used for those whose income exceeds the maximum capacity allowed for chapter seven and eleven. Because of this, those who file for chapter thirteen bankruptcy will pay money owed through a debt repayment plan.

These plans often vary in length from three to five years. The major benefit of chapter thirteen bankruptcy is that it protects your nonexempt property from being liquidated.

How You Can Build Credit After Bankruptcy

Someone going through their wallet and holding out a credit card.
Rebuilding credit is an important step to take after bankruptcy. Image courtesy of My Bank Tracker.

There are many steps you can take to rebuild your credit score after filing for bankruptcy. First, after you are done filing for bankruptcy and everything has been processed, it is important to check any credit reports you have for mistakes. When doing so, you are double checking that your credit accounts have been discharged of debt and currently show $0 of money owed.

Additionally, an extremely important thing to do after the bankruptcy proceedings end is to double check which accounts you still have debt in. Bankruptcy often wipes debt off most accounts, but sometimes there are a couple in which you still owe money to. In that case, it is critical to make these payments on time in order to build credit.

One way that you can start to build credit back after bankruptcy is by using a credit builder app. Through these apps, you can take out a loan and gradually pay it back. Like any other loan, each payment is a boost to your credit score. The best part? At the end of the contact term, you get your money back.

Another step to take is to register for secured or retail credit cards. Both will help rebuild your credit score however these work slightly differently than normal credit cards. Secured credit cards give you a credit limit that is the equivalent of money you deposit at the beginning of the term.

Retail credit cards are similar to the credit cards you are used to in terms of paying structure, however they possess increased interest rates and late fees. Check out some of the best credit cards to use when trying to improve credit after bankruptcy.

Having a stable and reliable job is also a way to build credit. This is because it increases banks’ confidence in your ability to meet the time requirements set out for debt payments. Furthermore, setting up a schedule or goal-list of when you will pay your debt obligations is a great way to regain confidence in yourself.

Another step you can take in order to build credit is to opt for a small loan. With a small loan, the bank is more likely to approve you even after filing for bankruptcy, and it’s a good way to begin allocating money responsibly. Making these payments on time on a small loan is easier and it also displays to banks that you are a trustworthy customer. This is also a good way to hone in on and refine your schedule/goal list regarding debt payments.

Lastly, in order for all these actions to have the maximum amount of positive impact on your credit score, it is very important to report them to credit bureaus. In order to do so you must specifically request your lenders to send all your recent activity to credit bureaus such as Experian, TransUnion, and Equifax.

When lenders report your activity to credit bureaus, it guarantees that credit bureaus are taking into account all your recent activity when calculating your credit score.

Tips to Dealing with the Emotional Burden and Aftermath of Bankruptcy

Two women sitting together, enjoying each other’s company, talking, and smiling.
Filing for bankruptcy can take its toll emotionally, however surrounding yourself with those you love can help lessen the burden. Image courtesy of Calm.

Going through bankruptcy can be an extremely stressful experience. Even once you are done with the whole process, you unfortunately still have to worry about rebuilding your credit score. In stressful times like these, it is important to make sure you don’t neglect your wellbeing.

First, it is important to remember that filing for bankruptcy does not mean you are a failure. In fact, it is quite the opposite. It takes a lot of strength to recognize you need help and then go on to actually pursue that help. You still have many chances in which you can work towards your goals and achieve success after bankruptcy.

Secondly, after filing bankruptcy, you may feel down on yourself. In order to combat these feelings, it is important to actively work to build yourself back up. For instance, some great ways to improve your mood, self-confidence, and remind yourself that the world isn’t ending are:

  • Take care of yourself mentally: Talk through your feelings with a loved one or mental health professional, listen to self-help podcasts, practice self-care.
  • Learn to meditate or practice mindfulness
  • Spend time with friends and family.
  • Acquire a new hobby.
  • Start a new book or TV show.
  • Watch your favorite comfort movies.
  • Exercise often: This is a great thing you can do in order to naturally raise your dopamine and endorphin levels, and therefore help you feel better.

Remember, things always seem worse than they are. The storm will always pass. Bankruptcy, and rebuilding credit after bankruptcy, can seem like a monumental challenge. However, there is always a light on the other side of the tunnel. Just do your best and everything will work out in the end.

Jan 6, 2023